Jean-Michel Glachant and his research team (Florence School of Regulation) discussed their latest results in Paris with EDF experts

1. Market design for RES integration
Jean-Michel Glachant
Director Florence School of Regulation
European University Institute (Florence, Italy)

2. Agenda
1.
WHAT IS MARKET DESIGN FOR RES INTEGRATION ?
2.
ENSURING SHORT-TERM FLEXIBILITY
3.
ENSURING LONG-TERM ADEQUACY
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3. What is market design for RES integration ?
Intermittent RES cannot be kept out of the market
 The rapid development of intermittent RES in Europe has been possible
thanks to:
• Support schemes often isolating RES from price risks (FIT/FIP)
• Priority of connection and dispatch
• Exemption of imbalance charges

But RES cannot be kept out of the market:
• Technical challenge: higher flexibility needs provided by a reduced
number of dispatchable units
• Economic challenge: wholesale prices are increasingly disconnected
from consumer bills and costs are rising => need for adequate pricesignals to ensure efficiency
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4. What is market design for RES integration ?
RES integration into current markets is challenging
 Intermittent RES feature :
• Variability (0-Marginal cost + Resource dependence)
• Low-predictability (forecasts significantly improving in the last hours)
• Site-specificity
 Challenging market arrangements that have been designed to
accommodate dispatchable thermal generation.
 RES integration is an economic problem. Flexible resources are available
but their value must be reflected in price-signals delivered by the
market(s), in order to:
• Ensuring efficient flexible operations in the short-term
• Ensuring efficient investment in the long-term
• While achieving decarbonisation targets at the same time !
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5. What is market design for RES integration ?
The two paradigms for RES integration (1)

RES integration can be conceived as two paradigms:
• “Melting-pot” integration = Same rules for intermittent and
dispatchable RES.
 “Need to eliminate distorted market signals, and a new equilibrium
will be achieved”:
−
Improvement of maintenance planning
−
More efficient system balancing
−
Optimal site selection and technology combinations
−
Incentives for innovation and better forecast
−
Higher transparency
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6. What is market design for RES integration ?
The two paradigms for RES integration (2)

RES integration can be conceived as two paradigms:
• “Salad-bowl” integration =Rules adapted to the technical specificities
of each technology
 “Intermittent RES and dispatchable generators are fundamentally
different”:
−
High risks/low gains as RES are inflexible anyway (depending on
resources availability, very little maintenance)
−
Without dynamic prices contingent to the availability of the resources,
the optimal energy mix cannot be decentralised (Ambec & Crampes,
Chao)
−
Incentives to incumbent owning both RES and dispatchable generators to
use market power.
 Two different paradigms with pros & cons BUT under both paradigms,
market design will have to evolve to ensure short-term flexibility/ longterm adequacy
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7. Ensuring short-term flexibility
Evolutions of products exchanged: time
 Exchanges are based on time definitions (e.g. hourly products)
 Trade-off: simplicity and liquidity vs. cost-reflectivity
 As residual load (=Demand-RES) variations get faster, temporal granularity
must be refined to reflect the value of flexibility.
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8. Ensuring short-term flexibility
Evolutions of products exchanged: time (2)
 BUT finer temporal granularity makes it more difficult to internalise
“non-convexities” (Start-up costs…) :
• Internalising start-up costs in shorter time-units is costly (12 times
more in a 5-min product than in an hourly product)
• Especially important as cycling and start-up costs are to increase with
RES penetration.
• Complex bids is the current solution BUT:
− The number of consecutive block orders is to increase dramatically
as time-units are reduced (300 different products per day with
one-hour definitions, > 40.000 per day with 5-minute definitions)
− Complex bids work well when peak-periods can be easily
identified (not the case with large-scale RES)
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9. Ensuring short-term flexibility
Evolutions of products exchanged: space
 Exchanges are also based on space definitions
Geographic representation of nodal marginal prices
Bar represents energy prices at nodal level: from €10/MWh in blue to €100/MWh in red (Source: CPI Smart power market project)
 Transmission constraints occur within countries (e.g. Germany), not at the
national borders.
 Transmission constraints fluctuate with RES availability
 To reflect reality, need for zones small enough (≈Nodal pricing) to be
valid at all times
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10. Ensuring short-term flexibility
Evolutions of products exchanged: space (2)
Source: Potomac Economics, 2012 State Market report for the New York ISO markets
 Allocating transmission capacities based on NTCs will be even more costly when RES
variability must be taken into account…
BUT Optimisation of flows across two systems with nodal pricing is challenging
 Probably need to chose between FBMC and small zones/nodal
 Increased coordination is required between neighbouring TSOs to exchange
information: will cooperation (e.g. Coreso, TSC) be sufficient ? One European ISO ?
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11. Ensuring short-term flexibility
Evolutions of products exchanged: prices
Price range in wholesale
markets (€/MWh)
 No rationale for different price-caps in a market with a high share of RES (as they are
to reflect VOLL)
BUT price-caps are more important when a higher share of generators’ revenue is
made at times of scarcity: need to ensure that the value of flexibility is not bounded.
 No rationale to limits to negative prices as these prices are needed to reflect the value
of flexibility at times of abundance (Spain: 400 hours with price = 0 in 2013; no
incentive for RES to curtail generation)
 Distortions have been observed due to different price-floors (e.g. Denmark/Germany).
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12. Ensuring short-term flexibility
The rising importance of balancing marketS
 Forecast errors of RES production improve significantly when getting
closer to real-time
 The balancing marketS (Intraday + Real-time) will gain in importance.
 The products exchanged in each of these markets are substitutes.
 Important to ensure the consistency all across the sequence of markets
(E.g. identical locational definition, no penalty for imbalances)
 Liquidity gets lower as more products are put into place. Trade-off
illustrated by intraday markets design in Spain vs. Germany
−
−
Discrete auctions (Spanish model) to enhance liquidity…
BUT difficult to find a set of gates suiting all the participants! Opportunities might
be lost compared to continuous markets (Germany)
 Can joint-optimisation of energy and balancing services be achieved in a
sophisticated set of markets without a single optimisation program?
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13. Ensuring short-term flexibility
Coordination with gas markets
As gas-fired power plants (GFPP) are to provide the required flexibility in power systems,
the value of flexibility should be reflected in gas markets.
 Gas storage+GFPP can be a substitute to electricity storage; gas transmission+GFPP
can be a substitute to GFPP+Electricity transmission.
 Need to make sure that the price-signals are not distorted by market arrangements
(zones, balancing time-period)
 It does not mean that definitions in gas and electricity should be aligned, as both
flows have different physical properties!
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14. Ensuring long-term adequacy
Is an energy-only market sufficient ?
 In theory… YES! A new equilibrium should be found, and very high prices at times
of scarcity should allow generators to cover their fixed costs.
 BUT existing power plants sell at lower prices for a smaller number of running
hours.
Generation costs and electricity prices in Germany
Source: Matthes et al. (2012)
 Is it temporary ? Overcapacity due to lower demand / RES development
 Is it structural? Due to high share of intermittent RES with zero marginal cost.
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15. Ensuring long-term adequacy
Design of CRM in a context of RES integration
 The rationale for a capacity remuneration mechanism:
• Lack of demand-response and price-caps limiting scarcity rents
+ Also lack of supply-response as the share of RES increase
• Political uncertainty (RES subsidies, frozen retail prices…)
 BUT what is needed is not “capacity”, it is the ability of generators to deliver
energy when and where needed:
• Peaks occur at times of low RES and/or high demand
• Congestion patterns also variable
 An adequate CRM design should respect the same temporal and locational
granularity as the energy market, which will increase complexity.
 Current designs of CRM are still relatively short-term and will not solve the
issue of political uncertainty. Can we ensure adequacy without some form of
long-term contracts ?
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16. Ensuring long-term adequacy
Long-term signals for grid development
 Locational signals are important due to:
• Strong site-specificity and trade-off connection costs/ generation profits
• Variability making gold-plating very expensive
 Need to connect new generators and enforce the existing grid: 80% of the
bottlenecks identified in the TYNDP are due to intermittent RES.
 It is difficult for TSOs to:
•
Anticipate RES development as time constraints are very different (>10 years
for a 400 kV line)
• Finance the required investments at times of low demand growth
 BUT establishing accurate long-term signals (e.g. deep costs) for grid users
is quite difficult, especially with a significant share of variable RES.
 Can short-term locational signals be sufficient ?
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17. To conclude…
A few open questions
1.
Time granularity: finer to reflect the value of flexibility or broader to
internalise non-convex generation costs easily ?
2.
Space granularity: smaller zones (Nodes) vs. FBMC ? Which level of
coordination between neighbouring zones ?
3.
Can participants handle a sophisticated set of markets ? Are pool-type
arrangements required ?
4.
Can we ensure long-term adequacy in an energy-only market without
some form of long-term contracts ?
5.
Can locational signals be only short-term ?
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18. Thank you for your attention
Email contact: jean-michel.glachant@eui.eu
Follow me on Twitter: @JMGlachant
Read the Journal I am chief-editor of: EEEP
“Economics of Energy and Environmental Policy”
My web site: http://www.florence-school.eu
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